Kolar and Dubai

Blog | December 18th, 2009 | 1 Comment

When people start to talk about the risks of too many loans in microfinance, you know that the industry has exploded in certain regions. Microfinance in India has grown in a big way, from Rs 900 crores (USD 200 million) in 2005 to Rs 11,700 crores (USD 2.5 billion) in 2009. Thats a big change, but the growth in india has not been very uniform, with some states getting a far bigger share and some states getting none.

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Livemint.com reports – “Microfinance firms, institutions that give small loans to poor people, have agreed on a voluntary credit code to ensure that the boom in lending to the unbanked does not lead to loan losses. Among key decisions taken at a meeting in Mumbai on 7 December were not to offer above Rs50,000 to any single borrower and not more than three lenders lending money to one individual. Currently, the size of a micro loan is capped at Rs25,000, but borrowers often take three or four times this from multiple lenders, putting pressure on themselves. While delinquency is low in large microfinance firms, there is apprehension they may be hit by loan losses.”

Rs 50,000 amounts to USD 1090, and that amounts to a lot of money. If we talk about alleviating poverty through microfinance, are’nt we going overboard when we say that we will not collectively give any borrower more than 1000 USD. Why not spread your risks, and go out to other states, where the concentration of microfinance is low?

Finally the microfinance industry in India is talking of self policing. This was bound to happen, especially in a industry which runs on trust and which is attracting a huge amount o capital. Finally we are talking about a credit bureau for microfinance. All this is good, but we must ask what’s prompting all this?

Less than a month back there was a mass default of microfinance loans in the Kolar district of karnataka, kolar now is responsible for half of the NPAs (non performing loans) of MFIs in India.Lets look at Kolar – the population of the district is 1.3 million people, of which 1 million is the rural population. Now one would imagine that a population of 1.3m out of a total population of 1156 million is hardly a drop in the water. But it the concentration of MFIs with too much money chasing too few people, which places too much risk on a particular region. The number of people who defaulted was 53,000 and the total capital at risk was 11.6m – there were 8 MFI’s operating in the same region. The real reason for the default was religous – the muslim clerics forbid people from making interest payment – and non muslims also rode the wave (which is a big risk in MFI, if the system breaks down – people with good credit will also default). CGAP has a good read on this issue – click here .

Microfinance is a young business model, and it has recently attracted commercial capital. As it grows it will adapt itself to the challenges that it faces, but as kolar is to dubai – we only recognize a problem after we hit a crisis. We should be more proactive in managing these risks, as commercial capital is more demanding than donations, and how we behave now could shape the future of microfinance.